EB5 Visa Holders – Non-Resident Tax is part two of our series on tax planning for EB5 visa holders who become legal permanent residents of the USA.

Changing citizenship to avoid taxes: Not advisable

There is a special tax on former citizens and long-term permanent residents whose main reason for moving to a foreign country is to avoid U.S. income tax or estate and gift taxes.  Section 877 imposes this tax regardless of your reason for changing citizenship and moving abroad.

You’re subject to this tax if you’re an expatriate with a net worth of $2,000,000 or more (adjusted for inflation), and if your average annual net income tax liability for the five years before you left the U.S. was $147,000 or more for 2011 ($151,000 for 2012). All expatriates who are subject to this tax under the code have to submit a statement of residence and citizenship and a statement of assets and liabilities.

If you fall into this category, the IRS automatically assumes that you’ve changed your citizenship and/or moved abroad to avoid taxes in the U.S.

There is only a small class of high net worth expatriates who are not assumed to have moved or changed citizenship for tax reasons. This class is also described in Code Section 877. If you think Section 877 may affect you, it’s worth checking to see if you fall into this group.

This exempted class of expatriates consists of the following:

• Expatriates who were dual citizens at birth and who have remained citizens of the second country;
• Expatriates who, at the time they became expatriates, were citizens of their birth country, or of the birth country of their spouse or of either of their parents;
• Expatriates who were in the U.S. for no more than 30 days each year during the 10 years before they became expatriates;
• Expatriates who renounced U.S. citizenship before they reached age 18½.

The Internal Revenue Service has begun many programs to identify non-filers and to improve compliance.  In the Middle East alone the number of returns filed has increased by 51% due to compliance programs.

The IRS created Form 2555EZ to simplify filing.  It also revised Publication 593—tax highlights for U.S. citizens and residents going abroad—to encourage taxpayers to file. In addition, Publication 519—the U.S. Tax Guide for Aliens—and the instructions to Form 1040 NR (non-resident) make former citizens and long-term resident aliens aware of their potential tax liability under Section 877.

The IRS has also put a number of programs in place to identify non-filers.  If you are an expatriate and aren’t filing your U.S. taxes, keep in mind that eventually you’ll be identified as a non-filer.  And like elephants, the IRS never forgets.

For a free tax consultation, contact:

Glazer Financial Network (Maurice M. Glazer); email: mglazer@whicheb5.com